IATA Raises 2011 Profit Outlook

The International Air Transport Association (IATA) has raised its 2011 overall profit outlook by a massive 73% to $6.9 billion on the back of strong demand in Europe and the Middle East as well as improving passenger traffic and cargo volumes in Japan.

Increased ticket prices and improved ancillary revenues further led to the upward revision. Several airline companies such as United Continental Holdings Inc. ( UAL - Analyst Report ) , Delta Air Lines ( DAL - Analyst Report ) , Southwest Airlines Co. ( LUV - Analyst Report ) and JetBlue Airways Corporation ( JBLU - Analyst Report ) implemented fair hikes several times in a year.

This is the first time the IATA lifted its profit forecast in the year. The Association had slashed its 2011 profit projection first to $8.6 billion in March and then to $4 billion in June compared with $9.1 billion forecast last year. Revenue is expected to fall slightly to $594 billion from the prior projection of $598 billion. But the projection is up from $565 million reported in 2010.

Fuel prices, estimated at $176 billion for the full year, will be a drag on profits. Fuel will account for 30% of the industry costs this year compared with 13% a decade ago. The estimate is based on the Brent crude prices at $110 per barrel and jet fuel prices of $126.50 per gallon.

Despite the rising fuel prices and economic volatility, airline companies are expected to be more profitable than previously expected. The IATA projects strong demand growth of 5.9% in the current year and 4.6% in the next. Freight growth would slide to 1.4% in the year from the prior expectation of 5.5%. Growth will accelerate to 4.2% in the next year. Despite the expected demand and freight growth, the profit margin is expected to be only 1.2% for 2011 and 0.8% for 2012.

The bulk of airline profits are expected to come from Asia-Pacific carriers, which would generate $2.5 billion of profits compared with the prior outlook of $2.1 billion. Profits from North American carriers would increase to $1.5 billion from $1.2 billion expected previously. The Latin American carriers profit outlook has improved six times to $600 million.

Previously, the African air carriers were expected to generate a loss of $100 million this year. Now, they will likely break even.

Further, the IATA provided an initial outlook on 2012 profits. The Association expects profits to fall to $4.9 billion due to the deterioration in the world economic conditions. Revenue would increase to $632 billion due to aggressive fare hike actions. Fuel costs will rise by another 2% next year, taking fuel expenses up to $201 billion.

We are currently maintaining our long-term Neutral rating on Delta Air Lines, United Continental, Southwest Airlines, JetBlue. For the short term (1–3 months), Delta and United retain a Zacks # 3 (Hold) Rank while Southwest and JetBlue hold Zacks #4 (Sell) Rank.